I'm a private money manager and freelance writer focused on Peak Oil and Climate Change as investment themes. I manage portfolios for individual clients and am co-manager of the JPS Green Economy Fund, a hedge fund open to accredited investors looking for exposure to Peak Oil and Climate related themes. I no longer write for Forbes, but I'm Editor at AltEnergyStocks.com, where I've been analyzing clean energy stocks since 2007. I live in Upstate New York, and am a runner and a woodworker. Since I write for several sites, you can follow me on Twitter, where I tweet new articles and links to other things that catch my eye on the web. DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results. This blog contains the current opinions of the author and such opinions are subject to change without notice. Blog entries are distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

Solar REITs: A Better Way to Invest in Solar [Updated]

The last day for a solar developer to submit an application for the Treasury’s 1603 grant program was September 30th, and only for grandfathered solar projects which broke ground before the end of 2011.

Solar panel prices have continued to drop this year, but solar project development remains a capital-intensive business. The 1603 program allowed solar developers to monetize the solar investment tax credit (ITC) much more quickly than they could otherwise, and this essentially reduced their cost of capital. As the rush of projects begun before the end of 2011 are completed, developers are looking for new ways to finance their next projects, especially since traditional forms of financing have been harder to come by since the financial crisis.

Jan Schalkwijk, CFA, a portfolio manager with a focus on sustainable investments at JPS Global Investments based in San Diego, CA says, “Any solution that further improves financing of solar projects should be of interest to investors; especially if returns come in the form of dividends, from financial structures that are collateralized.”

The Solar REIT

Currently, the only way a small investor can invest in solar is by buying stock in solar manufacturers. I have long argued that solar manufacturers are unattractive as an asset class because of the fiercely competitive nature of the solar industry. The massive decline of solar stocks over the last several years has convinced most investors of the danger of investing in solar manufacturers, even when solar installations are skyrocketing. Since inception in April of 2008, the Guggenheim Solar ETF (NYSE:TAN) has fallen 93%, while solar installations have risen six-fold with rapidly falling costs.

While those rapidly falling costs destroy solar manufacturer margins, they improve the opportunities for profitable solar farms. Yet stock market investors find themselves shut out of this opportunity. The two layers of taxation for public companies make common stocks a less than ideal investment medium for solar farms, unlike the private equity investments and LLCs used by large investors.

What sort of structures might be attractive? Master Limited Partnerships, or MLPs come immediately to mind, since they combine the tax structure of a limited partnership with the liquidity of public exchanges. MLPs allow the investor to avoid the two layers of taxation by passing their tax liabilities (and benefits) through to their limited partners (shareholders), which leads to a level of tax complexity most small investors are unaccustomed to.

In addition, MLPs are limited by law to specific businesses, mostly fossil energy extraction and transport. While extending MLPs to solar and other renewable energy has a certain appeal on the basis of fairness, such an extension would require an act of Congress.

Senator Chris Coons (D) of Delaware introduced The Master Limited Partnership Parity Act to allow MLPs to invest in renewable energy on June 7th, and Representative Ted Poe (R) of Texas introduced identical legislation in the House September 19th. Unfortunately, the chances of these bills becoming law seems low. Govtrak.us puts their chances at only 4%.

A second appealing structure is the Real Estate Investment Trust (REIT). Like MLPs, REITs avoid the double taxation of traditional corporate structures, and are limited to investing in certain asset classes, which in the case of REITs means real property. REITs pass through their income, rather than their tax liability to investors: REIT dividends are treated as ordinary income to the investor.

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You’ve written in the past that PW needs to grow (to better manage the expenses of being public) and plans to grow. Is there still good reason to believe that a favorable transaction might well happen in the near-term, even short of an IRS ruling? Looks like CEO Lesser has been purchasing stock lately.

Lesser bought stock in August, so at the time he must not have thought that anything would happen in the very near term… but that does not mean much now that it’s two months later. When I spoke to him in early September, he was still working on potential deals.